You are here

Is Marketing for the Average Good Enough?

The dairy market has made a significant advance upward the past six months with prices moving into record high territory. It appears dairy producers are becoming somewhat complacent with higher prices, anticipating that deferred months (due to their discount to the front months) will have to work higher. Often we hear dairy producers argue that, by doing nothing, they sell the average over time since they sell milk on a monthly basis. When prices are high, they receive the highest prices possible and are willing to accept the worst prices when prices are low. In theory, they are selling the average and are comfortable with this. We see three potential flaws with this approach.

The first flaw is that dairy producers who utilize this approach are assuming equal numbers of highs and lows. Therefore, if the market is $1.00 above the average six months of the year and below the average for six months by $1.00, then you have sold the average. Is that the way markets really work? Most likely not. Higher-priced markets have a tendency to be short lived, and low priced markets have a tendency to linger for longer periods of time. Therefore, if you are selling on a monthly basis, the argument of this approach is simply that, over time, you are selling below average.

The second potential flaw with this strategy, assuming you could sell the average, is you are at best "average". Is this ultimately the goal for your farm operation? Do you want to be just average? What about production and input purchases? Are you willing to only be average in these areas as well? If so, in a competitive industry (and dairy is), you will find yourself falling behind your peers. Why not strive to be excellent in marketing, input purchases and production?

As marketers, you should be executing the best business practices possible to  build a weighted average price that over time shifts risk and takes advantage of opportunities. Marketing can take tremendous effort and become filled with lots of second guessing. In the end, those who approach the market from the right perspective utilizing the right strategies will likely surface as above average over time.

The third flaw that we see is the potential to forego significant value opportunities that could present themselves. As an example, what if you sold futures for the next six months? If prices dropped hard the next two months, you may be able to pull gains out of the market. Our point is you can manage the market rather than letting the market manage you.

Now is the time to plan. Hoping for the best and accepting average is, over time, a recipe for low or non-growth. Everything changes over time. Challenge yourself to be an above average marketer.

--------

If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider

whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent

limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No

representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained

herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior

written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and

is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such

research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson

refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity

Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson

Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the

company or companies providing the services discussed in the email.

Read more about

Talk in Marketing

Most Recent Poll

How much of your 2016 soybean crop is planted?